GST on Director’s
Remuneration / RCM on Directors fees or remuneration
By
Yogesh Verma (CS/LLB) / 2 min read / GST Case Law
Introduction:
A company is an artificial person established under the Companies Act,
possessing a distinct legal existence. The company cannot operate or function
without human intervention. Although shareholders are the true owners, they do
not typically handle the daily management of the company. Directors, therefore,
step in to manage the company's affairs, make crucial decisions, and oversee
financial approvals.
Under GST, services
provided by a director to a company or body corporate are subject to the
reverse charge mechanism (RCM). This rule prompts several questions:
- Does the reverse charge apply to all
services provided by directors?
- Are directors considered employees of
the company, and if so, does their service fall under Schedule III (which
lists services not considered as supply under GST)?
This article explores
these issues in detail.
Director as an Employee:
Who Qualifies?
The term
"employee" is not specifically defined under GST law. Generally, an
employee is defined as someone employed for wages or salary, particularly at a
non-executive level. Establishing the relationship between an employer and an
employee involves key indicators such as hiring and firing authority, regular
salary payments, and other perquisites.
The case of independent
directors is distinct. Independent directors, not involved in managing the
company's daily affairs, are typically not considered employee directors.
However, whole-time directors, managing directors, and executive directors are
generally full-time employees.
Clarification by Circular
No. 140/10/2020-GST (Dated 10 June 2020)
The circular clarifies
that a whole-time director may or may not be an employee of the company. The
definition of a "whole-time director" under Section 2(94) of the
Companies Act, 2013, includes those employed full-time by the company. Thus, if
a director is employed full-time, any services provided by them are covered
under Schedule III of the CGST Act and therefore not subject
to GST.
Executive vs.
Non-Executive Directors: Key Differences
While the Companies Act
does not classify directors explicitly, companies often categorize directors as
either executive or non-executive directors:
- Executive Directors:
Involved in the day-to-day management and decision-making of the company,
such as whole-time directors and managing directors. These individuals are
full-time employees of the company, earning remuneration in the form of
salaries.
- Non-Executive Directors:
These directors do not participate in the daily operations of the company.
Typically, independent or part-time directors, they earn remuneration in
the form of fees or commissions, rather than salaries.
Application of Reverse
Charge Mechanism (RCM)
One of the significant
ambiguities is whether all services provided by directors are
subject to RCM or only those rendered in their capacity as directors. According
to Notification No. 13/2017 – CT (Rate), services supplied by a
director to the company are subject to RCM. The notification, however, does not
specify the particular services covered under this mechanism.
Clarification by Circular
No. 201/13/2023-GST (Dated 1 August 2023)
The CBIC has further
clarified that services provided by a director in their private and
personal capacity, such as renting immovable property to the company,
are not taxable under RCM. This clarification helps to draw a
distinction between professional services provided by a director and personal
transactions with the company, with only the former being subject to reverse
charge.
GST Applicability on
Directors' Services: Summary
1. Whole-Time/Executive
Directors: Whole-time directors employed full-time by the company are
treated as employees, and services provided by them fall under Schedule
III and are not subject to GST.
2. Non-Executive
Directors: Directors not involved in the daily management (like independent
directors) are not considered employees. The services provided by them
are taxable under RCM.
3. Services
Rendered in Private Capacity: Any service provided by a director outside
their official role, such as renting property, is not subject to RCM.
Conclusion
The GST treatment of
services provided by directors’ hinges on their employment status and the
nature of services provided. Whole-time directors, being full-time employees,
fall outside the scope of GST under Schedule III. However, non-executive
directors and services provided in their professional capacity are taxable
under the reverse charge mechanism.
Understanding these
distinctions is critical for companies to ensure proper GST compliance,
particularly in scenarios involving varying services from directors. Recent
clarifications by CBIC have provided much-needed clarity, helping companies
navigate the GST landscape in relation to directors' services.
Disclaimer: All
the Information is based on the notification, circular and order issued by the
Govt. authority and judgement delivered by the court or the authority
information is strictly for educational purposes and on the basis of our
best understanding of laws & not binding on anyone.
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